More than $350 million in Twin Cities real-estate loans tied to commercial mortgage-backed securities (CMBS) were in various stages of delinquency at the end of 2009, according to Trepp, a national real estate mortgage information-and-analysis firm.

The local delinquency rate among CMBS loans was 6.27 percent at the end of December, up from just 1.02 percent a year earlier, Trepp reported. Loans are classified as delinquent when they are past due for 30 days or more, in foreclosure, returned to the lender following an unsuccessful foreclosure sale or beyond their maturity and nonperforming.

The total balance of the delinquent loans was $352 million and included mortgages for 33 Twin Cities properties across various types of commercial real estate, including office, industrial, retail, lodging and multifamily housing.

Trepp, based in New York, provides CMBS and other commercial-mortgage information to global securities and investment-management industries. The company is frequently cited in The Wall Street Journal, Bloomberg News and Commercial Mortgage Alert. Trepp collects its data on a monthly basis directly from loan servicers and trustees.

Some of the mortgages on the list are widely known for being in trouble, such as the $65 million loan balance for Woodbury Lakes shopping center, which went back to the lender in September, and an eight-building portion of the Pentagon Park office complex in Edina, which was reported in December to be in default and headed to foreclosure.

Other properties on the list are more of a surprise, such as the $54.8 million loan for the Shoreview Corporate Center, which was 30 days past due, and the former Buffets headquarters in Eagan, which has a $19.3 million mortgage and is in foreclosure, according to Trepp.

US Bank Center, at 101 E. Fifth St. in downtown St. Paul, is listed as being 30 days delinquent on a $39.7 million mortgage. The 38-year-old building is about 65 percent occupied and is reeling from the departure last year of ECMC Group, which moved its 104,000-square-foot headquarters out of the building to Oakdale.

Kevin Shields, president of Los Angeles-based Griffin Capital, which owns the building, said the company let the mortgage go into default as a proactive measure to get the attention of the lender so that the loan can get restructured. Griffin is still paying interest on the loan while it works with a special-servicing agency representing the lender, and it is setting aside a portion of the building’s monthly revenue to attract new tenants. Shields said he doesn’t expect the building to go into foreclosure.

The entire CMBS system has systemic faults, Shields said, calling it “ludicrous” that the only way to get a CMBS loan restructured and sent to a special servicer is to formally default on it. “I suspect that other properties on the list are in very similar circumstances, and others are in much more dire circumstances.”

National problem

The number of CMBS delinquencies is rising nationwide because outstanding balances on many highly leveraged loans are larger than property values due to the weak real estate climate and declining operating incomes. The national delinquency rate for CMBS loans increased to 6.07 percent at the end of 2009 from 1.21 percent a year earlier, according to Trepp.

With more than $150 billion of CMBS loans scheduled to come due in the next three years, Fitch Ratings predicts the delinquency rate will reach 12 percent by 2012.

“I think the trend will probably continue until the economy right-sizes, and who knows when that will be?” said Bob Bayer, vice president of special asset solutions at Coldwell Banker Commercial Griffin Cos. in Minneapolis., which is not related to Griffin Capital.

Of the 33 CMBS loan delinquencies in the Twin Cities, 14 are either in foreclosure or have gone back to their lenders following a foreclosure auction. The other 19 loans are past due or are nonperforming beyond their maturity date, according to Trepp.

Despite the rising delinquencies, local real estate insiders don’t necessarily expect a sharp increase in foreclosures — at least not right away.

Jim Leary, senior vice president of the Minnesota private-client group for CB Richard Ellis Inc. in Bloomington, said he thinks most CMBS loans will be extended or restructured due to changes by regulatory agencies that make it easier for lenders to refinance loans before defaults occur.

“In cases where the loan is performing or just slightly under-performing, I think 100 percent of those loans will get amended, extended or restructured because it’s a better result for both the lender and the borrower,” Leary said. “It’s going to be the properties that are really broken that will go into foreclosure and go to market at some point.”

Bob Pounds, senior vice president of investment sales at Minnetonka-based Welsh Cos., agreed that many loans will be reworked, but said that will only delay the problem for another six months to a year. He doesn’t think the problem will be solved until the loans are addressed or the economy generates job growth, sparking commercial real estate activity.

“Somebody in the capital stack — either the lender or the borrower — has to take a hit at some point. It’s undeniable. … Eventually we have to pay the piper,” Pounds said, predicting that the number of foreclosures and deeds returned to lenders in lieu of foreclosure will grow.

Watch lists grow

With the number of CMBS loan delinquencies on the rise, the industry is keeping closer tabs on such loans.

In 2009, 40 such loans for Twin Cities properties were transferred into special servicing, including 30 that are in various stages of delinquency, according to Trepp. Lenders often transfer loans to a special servicer when they are in default, considered likely to default or otherwise in need of added attention.

Three of the five largest Twin Cities properties in special servicing are regional shopping malls owned by Chicago-based General Growth Properties Inc.: Ridgedale Center in Minnetonka (outstanding loan balance of $178.2 million), Eden Prairie Center ($79.8 million) and Knollwood Mall in St. Louis Park ($39.9 million). The malls’ loans — all of which are current — were transferred to special servicing last April when General Growth filed for Chapter 11 bankruptcy protection.

General Growth and its lenders recently agreed to restructure the debt for its Twin Cities malls and 82 other shopping centers, paving the way for the malls to exit the bankruptcy process. “These restructurings were a monumental step forward in our efforts to, in time, bring all our properties out of bankruptcy,” General Growth spokesman Jim Graham said, noting that the process has not affected any of the malls’ operations.

Other top properties in special servicing include Graves 601 Hotel Minneapolis (outstanding loan balance of $37 million), Landmark Towers in St. Paul ($16 million) and Lexington Hills Apartments in Eagan ($10.2 million).

Ben Graves, president of Minneapolis-based Graves Hospitality Corp., said the Graves 601 Hotel Minneapolis is in special servicing because it is changing brand affiliations, joining the upscale Wyndham Grand Collection. The lender, which had to sign off on the change, transferred the loan to special servicing to process that request.

Graves said the hotel should exit special servicing as soon as the brand transition is completed in the coming months. The hotel is current on its loan payments and expects to remain in good standing. “We have enough reserves in place to cover a downturn in the marketplace through 2013, even if we don’t see any improvement in occupancy or room rates.”

Meanwhile, the loans for an additional 124 properties have been placed on an industry watch list. The top properties on the watch list are Minneapolis City Center (outstanding loan balance of $85.5 million), Minneapolis Airport Marriott in Bloomington ($65.4 million), AT&T Tower in Minneapolis ($65 million), the American Express Building in Minneapolis ($56.1 million) and various buildings in The Parkdales office complex in St. Louis Park ($50.3 million).

Most of those loans are current and will never fall into delinquency, but the lender has cause for concern going forward. For example, an office complex may land on the list if it has a major lease renewal coming in the next 12 months, or a shopping center may be added to the list if occupancy rates fall below a certain threshold.

Largest CMBS loan delinquencies in Twin Cities

A loan is classified as delinquent when it is 30 days or more past due, in foreclosure, returned to lender after an unsuccessful foreclosure auction (REO) or nonperforming beyond maturity as of Dec. 31.

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